Real Estate Matters
By Elisa Jo Eagan
For many Americans, the dream of home ownership doesn’t stop at just one home; it encompasses a second home as well.
According to National Association of Realtors statistics, the percentage of homes that currently are used as a second or a vacation home has risen considerably in the last few years since the pandemic. In fact, part of this trend has been caused by the availability of work-from-home policies, making more frequent and long-lasting vacations a possibility for many families.
If you have been considering purchasing a second home, you will want to keep in mind the financial and logistical implications.
Choosing the location of a second home
Many times people fall in love with a vacation spot and impulsively decide to set up house in a second home in that area. However, this may or may not be the best place to purchase your second home.
Here are some things to consider before you decide whether to buy in your favorite getaway location or spend that money on a long-term rental there instead:
- How frequently will you be able to use the property?
If the property is too far away or inconvenient to access, then you may find that it is logistically difficult to set aside time to travel there, meaning that you will use it far less than you expect.
- How will a second home cut into your other travel?
If your idea of vacation bliss is fairly consistent, a second home may be a good option. If you like variety, however, you may find that a vacation home becomes a bit ho-hum after a few years.
- Will a second home work well for your family long term?
If your children are fairly young, will they still want to go to this vacation home in five years? Ten years? Will changes in your family create changes in the desirability of this destination?
- How will you manage the property?
Is there reliable property management in the area or will you find yourself constantly traveling to the home to take care of the property or make repairs and check up on its condition?
- Can you withstand the financial impact of a second home?
Are you saving adequately for your retirement or for emergencies? Do you have significant credit card debt? Do you have significant equity built up in your primary home? Make sure that you are on a sound financial footing before you take on the expense of an additional home.
- Is the second home part of a long-term plan?
Will you eventually retire there or allow one of your children to live there? This may make a difference in terms of practicality.
- Is it the right fit? Have you explored home prices, appreciation, and amenities in the area to ensure that this property and neighborhood are the right fit for you?
Financing a second home
Financing a second home may be as simple as financing your first home. You may obtain a conventional mortgage just as you would for a primary residence. However, be aware that most lenders generally see a second home as a riskier proposition than a primary residence, so you will probably pay a little higher interest rate, a larger down payment, and the credit and income requirements may be more stringent.
If you don’t want to take out a brand-new mortgage, you may want to consider the following strategies:
Home equity loan
Today’s record high equity levels and current interest rates may make a home equity loan a good option for financing your vacation home. By tapping into your home’s equity, you may be able to afford a second home while keeping your current monthly payment affordable.
Home equity line of credit (HELOC)
If you would prefer to keep your current home loan, you can apply to open a home equity line of credit to fund your vacation home in full or to fund the down payment for its purchase. This offers you the added benefit of HELOC funds that may be used for other purposes, including updates and upgrades to your primary residence as needed.
Affording a second home
If you are thinking about how to pay for that second home, you may decide to rent it out for part of the year in order to offset some of its cost. If you have applied for a new mortgage, however, this may turn your second home into an investment property, or an Airbnb, creating significant changes to the financing and to the tax structure.
One alternative is to purchase your second home as a joint venture with family members or friends. If you decide to go this route, you will want to ensure that you have everything spelled out in a legally binding written agreement in place covering the ground rules for the shared use of the home, as well as contingencies in the case of death, divorce, or desire on the part of either party to opt out of the home’s use and financing.
While it may feel uncomfortable to have these conversations, they can save you significant heartache and money in the future. By spelling out the rights and responsibilities ahead of time, you will make sure that everyone goes into the transaction with eyes wide open.
Tax implications of a second home
For the purposes of the mortgage application, a second home cannot be used as an investment property. For the purposes of taxes, there is an allowance of a few days of rental each year. Talk with your tax advisor about how you plan to use the home and the impact on your overall tax liability and deductions. If your second home is in another state, ask about how property ownership in that state will affect your tax burden as well.
With proper research and choosing the right property for you and your family’s needs, hopefully your second vacation home will reap many years of enjoyment and financial rewards for you and your loved ones.
For real estate information and advice, contact Elisa Jo Eagan, the “Real Estate Godmother,” at 609-703-0432. Learn more at www.TheRealEstateGodmother.com.
For More Real Estate Questions, Information and Advice Contact Elisa Jo Eagan “The Real Estate Godmother” (609)703-0432 and Remember…”There’s No Place Like Owning Your Own Home!”
